Delinquent homeowners can avoid foreclosure

THE NATIONS'S HOUSING

NEW YORK -- With one out of every 20 home mortgages now delinquent and recession-fed unemployment on the rise, lenders have an urgent message for homeowners in economic trouble: Let's work it out. If you can't pay your monthly mortgage, don't just sit there. Call us early, because we really don't want to foreclose on your house.

That's the emerging theme at major banks, S&Ls and mortgage banking firms across the country, particularly in soft housing markets. Some lenders are creating extensive outreach programs to identify and counsel borrowers whose financial ailments may be subject to corrective measures. Others are starting separate departments with trained personnel who offer detailed "menus" of workout choices for consumers.

New York's Dime Savings Bank has created a Customer Relations Unit to spot and work with delinquent mortgage borrowers heading for foreclosure. Senior Vice President Roger Williams says the outreach staff uses six basic techniques, but tries to customize solutions to each borrower's situation.

Atop Dime's workout menu is a "forbearance agreement." Forbearance is used in cases where borrowers have been laid off or have had medical problems preventing them from earning their regular incomes.

In a forbearance agreement, the bank allows the homeowner extra time to come up with missed monthly mortgage payments, rather than proceeding with foreclosure.

The customer has to make at least partial payments, and has to show signs that he or she will be able to handle the full debt load over the long term.

One Dime customer on Long Island, Anthony Minio, recently began a forbearance workout involving his severely delinquent $89,000 home mortgage.

Minio, a home-improvement contractor, suffered a heart attack, ran up big medical bills, and "fell behind on everything," as he put it in an interview. His $1,275-a-month mortgage payment was six months' delinquent.

Under forbearance, he paid Dime approximately $3,000, including legal fees. Earning income from his job again, he also resumed his regular $1,275 payments. The six-month unpaid debt will be handled by an extra six months added to the term of his loan.

"By putting that balance at the end [of the mortgage]," he said, "it put me in a position where I was covered."

Williams' second most popular workout arrangement is known as "pay-and-accrue." What that means, he said, is "You can pay us whatever you can afford right now and we will accept that and not put your loan into foreclosure."

The difference will accrue over time and be tacked onto the mortgage. That amount will be repayable either at some specified date -- like 10 years from now -- or be due whenever the house is sold.

Pay-and-accrue is particularly helpful in cases of two-income households where one earner is laid off with no immediate prospects of finding new employment.

Rather than force the couple out of the home, the bank agrees to take partial payments -- say $900 of a $1,500 regular mortgage bill -- for as long as necessary. The $600 per month unpaid balance becomes an accruing debt that must one day be satisfied in full.

Other workout options:

* Restructurings or recasts. This involves modifying -- or even tearing up -- the original mortgage. A 12 percent fixed-rate 15-year loan, for example, may be recast as a more affordable 9 percent rate on a one-year adjustable with a 30-year term.

* Extensions. These typically take whatever missed payments are due and turn them into "balloon" debts, payable in a lump sum during or after the original term of the loan.

* Asset collateralizations via relatives or friends. Say a young couple's income plummets because of layoffs. They fall $15,000 behind on their mortgage. Even worse, the resale value of their house is down 25 percent from when they bought it. Their mortgage debt is now bigger than the value of the property. Rather than foreclose, the bank extends a home-equity line of credit to the wife's mother, who lives in a debt-free home in the same town.

An immediate draw on the line of credit cures the $15,000 delinquency, and a reserve account is established to help pay the mortgage until the couple's income increases.

Workout remedies like these, of course, can't handle the most severe, long-term financial situations, according to lenders like Williams. In those instances, the property may be taken over by the bank through a deed-in-lieu-of-foreclosure arrangement. That means the owners simply hand over the title, the keys, pack up and move out. Though tragic, deeds-in-lieu arrangements leave borrowers' credit ratings intact. And both sides avoid the costs and legal hassles of a full-blown foreclosure.